The interim and final supervisory standards set forth below specify
minimum supervisory ratios based primarily on broad credit
risk considerations. As noted above, the riskbased ratio does not
take explicit account of the quality of individual asset portfolios or
the range of other types of risks to which banking organizations may be
exposed, such as interest rate, liquidity, market or operational risks.
For this reason, banking organizations are generally expected to
operate with capital positions well above the minimum ratios.

Institutions with high or inordinate levels of risk are expected to
operate well above minimum capital standards. Banking organizations
experiencing or anticipating significant growth are also expected to
maintain capital, including tangible capital positions, well above the
minimum levels. For example, most such organizations generally have
operated at capital levels ranging from 100 to 200 basis points above
the stated minimums. Higher
capital ratios could be required if
warranted by the particular circumstances or risk profiles of
individual banking organizations. In all cases, organizations should
hold capital commensurate with the level and nature of all of the
risks, including the volume and severity of problem loans, to which
they are exposed.

Upon adoption of the risk-based framework, any organization that
does not meet the interim or final supervisory ratios, or whose capital
is otherwise considered inadequate, is expected to develop and
implement a plan acceptable to the Federal Reserve for achieving an
adequate level of capital consistent with the provisions of these
guidelines or with the special circumstances affecting the individual
organization. In addition, such organizations should avoid any actions,
including increased risk-taking or unwarranted expansion, that would
lower or further erode their capital positions.

A. Minimum Risk-Based Ratio After Transition Period

As reflected in attachment VI, by year-end 1992, all bank holding
companies should meet a minimum ratio of qualifying total capital to
weighted risk assets of 8 percent, of which at least 4.0 percentage
points should be in the form of Tier 1 capital. For purposes of section
IV.A., Tier 1 capital is defined as the sum of core capital elements
less goodwill and other intangible assets required to be deducted in
accordance with section II.B.1.b. of this appendix. The maximum amount
of supplementary capital elements that qualifies as Tier 2 capital is
limited to 100 percent of Tier 1 capital. In addition, the combined
maximum amount of subordinated debt and intermediate-term preferred
stock that qualifies as Tier 2 capital is limited to 50 percent of Tier
1 capital. Allowances for loan and lease losses in excess of this limit
may, of course, be maintained, but would not be included in an
organization's total capital. The Federal Reserve will continue to
require bank holding companies to maintain reserves at levels fully
sufficient to cover losses inherent in their loan portfolios.

Qualifying total capital is calculated by adding Tier 1 capital and
Tier 2 capital (limited to 100 percent of Tier 1 capital) and then
deducting from this sum certain investments in banking or finance
subsidiaries that are not consolidated for accounting or supervisory
purposes, reciprocal holdings of banking organizations' capital
securities, or other items at the direction of the Federal Reserve. The
conditions under which these deductions are to be made and the
procedures for making the deductions are discussed above in section
II(B).

B. Transition Arrangements

The transition period for implementing the risk-based capital
standard ends on December 31,
1992.64
Initially, the risk-based capital guidelines do not establish aminimum
level of capital. However, by year-end 1990, banking organizations are
expected to meet a minimum interim target ratio for qualifying total
capital to weighted risk assets of 7.25 percent, at least one-half of
which should be in the form of Tier 1 capital. For purposes of meeting
the 1990 interim target, the amount of loan loss reserves that may be
included in capital is limited to 1.5 percent of weighted risk assets
and up to 10 percent of an organization's Tier 1 capital may consist of
supplementary capital elements. Thus, the 7.25 percent interim target
ratio implies a minimum ratio of Tier 1 capital to weighted risk assets
of 3.6 percent (one-half of 7.25) and a minimum ratio of core capital
elements to weighted risk assets ratio of 3.25 percent (nine-tenths of
the Tier 1 capital ratio).

Through year-end 1990, banking organizations have the option of
complying with the minimum 7.25 percent year-end 1990 risk-based
capital standard, in lieu of the minimum 5.5 percent primary and 6
percent total capital to total assets ratios set forth in appendix B of
this part. In addition, as more fully set forth in appendix D to this
part, banking organizations are expected to maintain a minimum ratio of
Tier 1 capital to total assets during this transition period.

This section IV.C. provides optional transition provisions for a
banking organization that is required for financial and regulatory
reporting purposes, as a result of its implementation of Statement of
Financial Accounting Standards No. 167, Amendments to FASB
Interpreta-tion No. 46(R) (FAS 167), to
consolidate certain variable interest entities (VIEs) as defined under
United States generally accepted accounting principles (GAAP). These
transition provisions apply through the end of the fourth quarter
following the date of a banking organization's implementation of FAS
167 (implementation date).

1. Exclusion Period

a. Exclusion of risk-weighted assets for the first and second
quarters. For the first two quarters after the implementation date
(exclusion period), including for the two calendar quarter-end
regulatory report dates within those quarters, a banking organization
may exclude from risk-weighted assets:

i. Subject to the limitations in section IV.C.3, assets held by a
VIE, provided that the following conditions are met:

(1) The VIE existed prior to the implementation date.

(2) The banking organization did not consolidate the VIE
on its balance sheet for calendar quarter-end regulatory report dates
prior to the implementation date.

(3) The banking organization must consolidate the VIE on
its balance sheet beginning as of the implementation date as a result
of its implementation of FAS 167, and

(4) The banking organization excludes all assets held by
VIEs described in paragraphs C.1.a.i (1) through
(3) of this section IV.C.1.a.i; and

ii. Subject to the limitations in section IV.C.3, assets held by a
VIE that is a consolidated ABCP program, provided that the following
conditions are met:

(1) The banking organization is the sponsor of the ABCP
program,

(2) Prior to the implementation date, the banking
organization consolidated the VIE onto its balance sheet under GAAP and
excluded the VIE's assets from the banking organization's
risk-weighted assets, and

(3) The banking organization chooses to exclude all
assets held by ABCP program VIEs described in paragraphs (1)
and (2) of this section IV.C.1.a.ii.

(b) Risk-weighted assets during exclusion period. During
the exclusion period, including for the two calendar quarter-end
regulatory report dates during the exclusion period, a banking
organization adopting the optional provisions in section IV.C.1.a must
calculate risk-weighted assets for its contractual exposures to the
VIEs referenced in section IV.C.1.a. on the implementation date and
include this calculated amount in risk-weighted assets. Such
contractual exposures may include direct-credit substitutes, recourse
obligations, residual interests, liquidity facilities, and loans.c. Inclusion of allowance for loan and lease losses in tier
2 capital for the first and second quarters. During the exclusion
period, including for the two calendar quarter-end regulatory report
dates within the exclusion period, a banking organization that excludes
VIE assets from risk-weighted assets pursuant to section IV.C.1.a may
include in tier 2 capital the full amount of the allowance for loan and
lease losses (ALLL) calculated as of the implementation date that is
attributable to the assets it excludes pursuant to section IV.C.1.a
(inclusion amount). The amount of ALLL includable in tier 2 capital in
accordance with this paragraph shall not be subject to the limitations
set forth in section II.A.2.a of this Appendix.

2. Phase-in period.

a. Exclusion amount. For purposes of this section IV.C.,
exclusion amount is defined as the amount of risk-weighted
assets excluded in section IV.C.1.a as of the implementation date.

b. Risk-weighted assets for the third and fourth quarters.
A banking organization that excludes assets of consolidated VIEs
from risk-weighted assets pursuant to section IV.C.1.a. may, for the
third and fourth quarters after the implementation date (phase-in
period), including for the two calendar quarter-end regulatory report
dates within those quarters, exclude from risk-weighted assets 50
percent of the exclusion amount, provided that the banking organization
may not include in risk-weighted assets pursuant to this paragraph an
amount less than the aggregate risk-weighted assets calculated pursuant
to section IV.C.1.b.

c. Inclusion of ALLL in tier 2 capital for the third and
fourth quarters. A banking organization that excludes assets of
consolidated VIEs from risk-weighted assets pursuant to section
IV.C.2.b. may, for the phase-in period, include in tier 2 capital 50
percent of the inclusion amount it included in tier 2 capital during
the exclusion period, notwithstanding the limit on including ALLL in
tier 2 capital in section II.A.2.a. of this Appendix.

3. Implicit recourse limitation. Notwithstanding any
other provision in this section IV.C., assets held by a VIE to which
the banking organization has provided recourse through
credit enhancement beyond any
contractual obligation to support assets it has sold may not be
excluded from risk-weighted assets.

64As noted in section I, bank holding companies with less
than $500 million in consolidated assets would generally be exempt from
the calculation and analysis of risk-based ratios on a consolidated
holding company basis, subject to certain terms and
conditions. Go back to Text